Payout fight heats up

Big philanthropic and nonprofit trade, advocacy and research groups are staking out positions on a bill to bar foundations from counting overhead as part of the funds they give to charity each year.

Two big trade groups for foundations and nonprofits have lined up against a bill, while a foundation research organization has questioned a watchdog group’s estimate about the increase in foundation giving it says the bill would spur.

And a membership group of statewide nonprofit associations says Congress should delay action on the bill until the critical issues it addresses can be studied in greater depth.

The Charitable Giving Act of 2003, or HR 7, would no longer let foundations count overhead in complying with the requirement that they give away 5 percent of their assets each year.

Foundations traditionally have used income earned from investing their endowment assets to meet that 5 percent “payout” requirement.

But big funders such as the Ford Foundation say the bill could force them to use endowment assets to cover administrative costs, and eventually could force them to spend all of their endowments.

Backers of the bill say foundations can afford to spend more, and should be spending more because the slumping economy is generating greater demand for charitable services while making it harder for charities to raise money.

The Council on Foundations and Independent Sector both oppose the bill’s payout measure.

The council, a membership and advocacy group, says the bill could hurt foundations by forcing them to dip into assets to pay for work that is critical to effective grantmaking and to boosting charities they fund.

“Foundations have been tremendously effective at building strong communities specifically because they are committed to using staff, research and hard work to make sure their grants are effective,” Dorothy S. Riding, the council’s president and CEO, says in a statement.

The council backs other provisions in the bill, including a measure to reduce the excise tax on investment earnings by private foundations.

That measure would let foundations give more to charity without eroding the long-term value of their endowments, the council says.

But it says the proposed change in the payout rule could force foundations to “erode” their endowments to carry out a variety of tasks, including publishing annual reports and web sites; communicating with grantseekers, policymakers and the media; conducting research and holding conferences; providing in-kind support; and operating libraries and museums.

“We know that Congress does not want to inadvertently diminish the effectiveness or the long-term viability of charitable endowments,” the council says. “Administrative expenses are an important part of the grantmaking process.”

Independent Sector, a membership and advocacy group for nonprofits that has foundation members, says it lacks the data to know whether the bill would help or hurt charity.

But after polling its members, the group opted not to back the measure.

“There is currently no conclusive evidence that this proposal would produce the desired outcome of increasing resources to charitable nonprofits without undermining effective grantmaking and public accountability,” the group says.

Administrative costs of foundations pay for work that is “vital to their ability to fulfill their management and program responsibilities to their donors and the public,” Independent Sector says.

That work includes conducting research; convening charity, civic and government leaders to identify successful programs and share lessons; and providing nonprofits with technical help on management assistance, program evaluation and how to raise public and private funding.

Independent Sector says it plans to convene researchers, grantmakers, public charities and others to study the payout issue.

The Foundation Center, which conducts research on foundation giving, says an estimate by the National Committee for Responsive Philanthropy on the bill’s impact on giving by private foundations is “grossly overstated.”

The National Committee, citing studies by other groups, estimates that private foundations could give $4.3 billion more a year while still sustaining themselves and becoming more efficient.

But the Foundation Center says it analyzed the studies cited by the National Committee and found the bill “would likely result in increased grantmaking totaling well under half of the $4.3 billion estimate.”

The National Council of Nonprofit Associations, a group that represents statewide associations of nonprofits, says the payout issue “is of such importance to the nonprofit sector and can have such significant consequences on society overall that it requires serious and open analysis and deliberation.”

Including the payout provision in the Charitable Giving Act of 2003, the group says, “is premature.”